Mutual Funds Try Something New: Plain English

Key investment documents put out by mutual funds have always sounded something like the Coneheads from “Saturday Night Live.” They were incomprehensibly technical. But now, a handful of investment companies are trying something novel--communicating in plain English.

* Fidelity Investments, the nation’s biggest fund company with $165 billion in assets, just finished a major overhaul of its prospectus--the legal document that spells out the strategies, risks, past performance and fees associated with an individual fund. The documents have been rewritten, reorganized and redesigned to set off important sections, show more with graphics and to treat English like a first language. The result: They’re actually fairly easy to comprehend.

* John Hancock, an insurance company that operates a family of 32 mutual funds, just issued new annual reports--the once-a-year updates that tell you how your fund has invested and performed.

The new document contains frank commentary from fund managers, who talk about which investments soared and which ones bombed and why. They also discuss future strategies and clarify the points with graphs and pie charts.

* T. Rowe Price is also in the process of revamping its annual reports. The Baltimore-based fund company says it expects to have new annuals out by spring.

“We are going to try to use the English language,” vowed Ed Bernard, the company’s vice president of marketing.

Although some talk about the revised materials is clearly tongue-in-cheek, the issue is not silly.

Over the last two decades, mutual funds have become one of the nation’s most pervasive investment vehicles. Industry experts estimate that 36 million individuals own stocks or bonds through a mutual fund. Mutual fund managers now control more than $1.5 trillion in assets.

The most important documents put out by these funds--the annual reports and prospectuses--have been dull, dry, technical, colorless, poorly organized and nearly impossible to read. As a result, some investors simply don’t wade through all the jargon. And that can leave them woefully unprepared for the risks they’re taking.

This problem is nearly as old as the industry itself. But fund managers have devoted new attention to it for a simple reason: Today’s low interest rates have sent thousands of bank and thrift depositors scurrying for other opportunities.

These individuals, who are believed to be somewhat less sophisticated than the average mutual fund investor, have poured billions of dollars into mutual funds during the last several months.

Net sales into mutual funds totaled $132.8 billion during the first eight months of 1992 versus $65.9 billion during the same period a year ago. If this pace continues, 1992 will be a record year for the mutual fund industry.

Industry experts fear, however, that these newcomers don’t fully understand mutual funds and are consequently somewhat uncomfortable with their investments.

If fund managers are not able to change that--and fairly quickly--the newcomers are likely to abandon the industry the moment interest rates rise. And they’ll take their billions of dollars with them.

“There is an element of shareholder retention here,” said J. William Benintende, a spokesman for John Hancock Mutual Funds. “If shareholders are comfortable with their investment and feel like the fund company is doing right by them, you are more likely to retain those assets even when the alternatives become more favorable.”

The recent emphasis on clear communication may have other roots as well. Some experts suggest that investors also are increasingly impatient. They want to be able to get the information they need by scanning investment documents instead of having to spend hours wading through legalese.

Statistics indicate that the bulk of American women are now working and trying to divvy up household chores. That leaves both parents with less time to relax, play with their kids or consider their investment options. Some fear that these busy folks will only invest with mutual funds if they can do so with a minimum of time and effort.

“People have just so much time,” said Ellen G. Hoffman, senior vice president at Fidelity Investments in Boston.

“Because we made it so difficult to invest, they had to spend more time than they wanted to. Some of them might just have decided to go elsewhere.”